May 2014
Finance and Administration

Endowments

This article is also available in Spanish here. Este artículo está disponible en español aquí.

Every church should have an endowment. Sometimes congregations have more than one.
And that can be confusing, especially if the policies and guidelines governing each aren’t clear.

When I joined my parish in 2002, a new endowment had just been started to encourage parishioners to remember the church in their planned giving and estate plan. The vestry created this quasi-endowment to fund outreach, capital expenditures, and one-time special projects. Investment professionals provided informative presentations to educate and encourage parishioners about making legacy gifts.

At the time, the church already had three endowments: one for the churchyard funded by a percentage of the gravesite revenue, a small one for music started in the 1960s, and a general endowment contributing to the operating budget of the parish. These were true endowments and restricted to use of the principal. The new quasi-endowment would not have these same restrictions.

Six years later, while serving as rector’s warden, the congregation received a bequest from a parishioner’s life insurance policy. The question arose as to where to put this gift.

By this time, two smaller gifts had been placed in the quasi-endowment. Adding this new, and much larger, gift would significantly increase the size of this fund.

Thinking back to 2008 and the fear in the economy, our church was not alone in running a deficit and finding parishioners falling a bit behind in pledges. The finance commission was looking to balance the deficit with this bequest, while the endowment commission felt it was most appropriate to place it in one of the endowment funds. As we reviewed the endowment documents, we found they were not as clear as we had hoped. The older documents had limited language and the newer quasi-endowment was divided into six parts that didn’t read clearly.

Thankfully, as we discussed this with the two commissions, it was agreed that the funds would go into the quasi-endowment, since there was language allowing for distributions in an extreme event where no other funds were readily available. The next task was to rewrite the documents so this confusing situation would not present itself again.

Setting up an endowment

We asked the Episcopal Church Foundation (ECF) to help us with this work. They assisted us with the revision of the quasi-endowment documents, making them much clearer and more informative. The result? We were able to talk to the congregation more effectively about planned giving, as there are clear options for a parishioner to designate his or her gifts.

Our experience is not unique. Every church should have a plan and a strategy for unrestricted gifts or income generated from thrift shops, leases, fairs, or special programs. Often this is an endowment. And, like many things, careful thought should go into the planning for and the creation of an endowment. Specifically, the endowment documents should give clear guidance on the purpose of the fund, whether it is restricted or unrestricted, outlining spending policies, purposes, and investment asset allocation.

Distributions

Since our vestries are made up of people with many different skills, it is important for them to understand the purpose of the endowment and if there are restrictions. The process for making distributions from an endowment has changed over the past decades from an “income only” approach to a total return spending policy, which is permitted in all 50 states in the USA.

A total return spending policy allows spending of both income and capital appreciation as a percentage of the fund. This is generally between 3% and 5% of a rolling average of the market value over some historical timeframe: three years is fairly common. Using a total return spending policy, distributions are more stable over time and take into account the growth of the investments rather than only the income generated.

Whether the endowment is a true endowment, donor restricted for special purposes such as music or scholarships, or unrestricted, the documents should require that the vestry approve distributions, with the endowment commission monitoring to ensure that distributions are in line with the stated purpose.

Gift acceptance policies

As we reworked our documents we recognized the value of having a gift acceptance policy. Does your congregation want a piece of property that may be hard to sell or an old car? What about artwork or other collectibles that may be hard to value? A gift acceptance policy gives the endowment commission and vestry the authority to accept or reject gifts. Sometimes they may direct the donor to liquidate the gift if possible.

Investment management

Choosing an investment manager can also be a challenge. Some churches have experienced investment professionals in the parish that can help provide guidance. There are many decisions that arise when choosing a manager, but some of the most important are:

  • Hiring a professional manager who understands the needs of the fund.
  • Full disclosure of fees associated with the management of the fund.
  • Advising on the appropriate asset allocation to fit the fund requirements.
  • Reporting fund performance compared to the stated asset allocation.
  • Working with a relationship manager who can answer questions and educate the congregation.

Bringing in a consultant

As my vestry learned, the key to a successful endowment program is getting the structure right. Sometimes the easiest way to do this is to work with an endowment consultant. In 2014, I joined ECF as an endowment consultant. In this role, one of the first things I do with a congregation is listen. Where is the congregation in the endowment process, how is it being discussed in the parish, what is the purpose, who is overseeing the management and performance of the fund? I work closely with the endowment chair or treasurer to review the church’s documents, answer questions about spending policies and investments, and whether their asset allocation is in line with their risk tolerance and goals.

My Congregation Today

Today our church has five endowments: three are the original true endowments, the quasi-endowment set up in 2002 and updated in 2008, and a second music endowment. This newer music endowment was started by a parishioner who wanted to leave a legacy to support music at our congregation and, understanding the purpose of endowments, felt this was the best way to do so.

My experience as rector’s warden helped me greatly in understanding the challenges of managing an endowment at a parish. If the proper resolutions, documents, and procedures are not in place, it can be a frustrating experience. When they are in place, it offers parishioners opportunities to experience the benefit of the gifts of others and encourages them to consider making a planned gift as well.

I often hear from churches that have not yet started an endowment in place, but you just never know when that wonderful gift might appear. Better to have the discussions around this potential event before it occurs so everyone is educated on the placement of the gift and the purpose of your endowment.

Lynn Mander, CFA, provides endowment management solutions to prospective Episcopal Church Foundation (ECF) clients. Before joining ECF, Lynn was chief investment officer at a regional bank serving high net worth clients and foundations. She has also worked as an analyst and institutional salesperson with major Wall Street firms and as an institutional portfolio manager. Lynn is an active volunteer with CFA Institute working with the disciplinary review committee that hears ethics violations and also with the CFA exam program. She serves on the advisory board of Episcopal House, a senior housing home in Phoenixville, Pennsylvania.

Try This: Does your congregation have a gift policy in place? And if so, when was the last time it was reviewed? Does it address these two issues?

  • Does your congregation want a piece of property that may be hard to sell or an old car?
  • What about artwork or other collectibles that may be hard to value?

Resources

  • Knowledge is Power” by William Doubleday, ECF Vital Practices’ Vestry Papers, May 2012
  • Swimming Naked” by Ken Quigley, ECF Vital Practices’ Vestry Papers, March 2009
This article is part of the May 2014 Vestry Papers issue on Finance and Administration